(Author: Jennifer Jiang, Attorney-At-Law, PRC)

On 19 January 2015, the Ministry of Commerce of China (“MOFCOM”) released a draft version of the Foreign Investment Law (中华人民共和国外国投资法（草案征求意见稿）) (the “Draft Law”) to solicit public opinions, which if adopted, will radically change the existing regime of foreign investment including M&A transactions in the PRC.

The three existing foreign investment laws – Sino-Foreign Equity Joint Venture Law, Sino-Foreign Cooperative Joint Venture Law and Wholly Foreign-Owned Enterprise Law (the “Foreign Laws”) will be abolished upon the adoption of the Draft Law.

Highlights of Changes

De Facto Foreign Investors

The concept of “actual control” is introduced to the definition of foreign investors. That is, any Chinese entity controlled by the foreign investor(s) will itself be classified as a foreign investor.

Corporate Governance

The corporate governance inconsistencies between the general law (the Company Law, the Partnership Law and the Law on Individual Proprietorship Enterprises etc.) and the special law (the Foreign Laws and related laws) will be eliminated.

Negative List Approach for Approval

The “negative list” for foreign investment approval, already employed by the China (Shanghai) Pilot Free Trade Zone, will replace the current “Catalog of Industries for Guiding Foreign Investment”. Establishment of any entity intending to engage in the unlisted industries will no longer require approval from MOFCOM or its local branches.

Reporting Requirements

A comprehensive reporting system is introduced. The reporting obligations overlap to a great extent with those required by the Administration of Industry and Commerce.